Bio Rad Laboratories Inc (BIO.B) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2004 Bio-Rad Laboratories incorporated conference call. My name is Mia and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of the conference. If at any time during the call you require assistance please, press star, followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Ron Hutton, Treasurer of Bio-Rad. Please proceed.

Thank you very much. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans, and expectations. Because our actual results may differ materially from these plans and expectations, I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The Company does not intend to update any forward-looking statements made during the call today. With that, I'd like to turn the over the call to Christine Tsingos for a discussion of our results.

Thanks, Ron. Good afternoon, everyone and thank you for joining us. Today we will review the fourth quarter and full-year financial results as well as provide some insight into our thinking for 2005. Our fourth quarter results reflect continued growth in achievement in many of our core businesses in addition, we have recently launched major new products in Diagnostics and Life Science and consolidated a full quarter's financial results of the MJ Research business. All of these events bode well for continued revenue growth in 2005 and beyond. The fourth quarter results also have been tempered somewhat by higher than expected spending levels and a higher tax rate.

Let's start with a review of the quarterly results. Net sales from continuing operations for the fourth quarter of fiscal 2004 were a record $307.9 million, an increase of 19 percent versus the same period last year sales of 258.1 million. The year-ago sales number reflects the divestiture of our Confocal business, that is now accounted for as a discontinued operation. On a currency neutral basis, reported revenues increased 14.1 percent. During the quarter we recorded strong growth within our Diagnostics group. This growth was the result of increased sales of blood virus, diabetes monitoring, and quality control products. Our core Life Science divisions also performed well with strong sales in our Protein Expressions, Consumables and Electrophoresis lines as well as good contribution from our newly-acquired MJ Research products.

In line with our guidance, the gross margin for the quarter was 54.7 percent, compared to 55.2 percent last quarter and 56.4 percent in the year-ago period. As we have been discussing for some time now, the year-over-year decline in gross margin is the result of continued overall pricing pressure in our BSE business combined with the increased costs associated with the MJ Research transaction, such as the amortization of intangibles. As part of our integration plan, we are currently implementing new processes and practices at MJ to help offset the impact of the amortization and improve their gross margin contribution in future periods. SG&A expense for the fourth quarter came in higher than expected at $111 million. These higher expenses are the result of spending that is typically associated with our year-end as well as expenses that were incremental to last quarter, such as $6 million of MJ operating expense, 3 million in additional external audit and SOX fees and $4 million of negative currency impact just for the quarter.

As you've been hearing over the past several quarters, the year-over-year increase in spending relates to our ongoing investment in Information Systems, Facilities, Manufacturing, and Personnel, as well as the quarterly expenses I just mentioned. Research and Development expense in Q4 was just over 10 percent of sales at $31.9 million, an increase of more than 20 percent from last year as we continue to invest in new products, technologies, and partnerships. Our target investment level in R&D remains 10 percent of sales. The tax rate used for continuing operations during the quarter increased to 37.5 percent, primarily the result in incurring non-deductible losses associated with our Brazilian operation as well as non-deductible expenses that are connected with the sale and liquidation of our Confocal business. We anticipate that both of these impacts are more one-time in nature and not indicative of future tax rates. However, this quarterly result will cause the full-year tax rate to be about 32 percent. Net income from continuing operations for the fourth quarter was 17.1 million, and diluted earnings per share for the quarter were $0.65.

And now for certain segment information. Life Science reported sales grew 21.6 percent for the quarter to $148.5 million. On a currency-neutral basis, sales increased an impressive 16.4 percent versus the same quarter last year. We continue to have strong year-over-year growth in our multiplex array product line and consumables as well as the incremental sales from the inclusion of MJ. This strong revenue growth was partially offset by a decline in our BSE business and continued softness in the Japanese market. Overall segment process from continuing operations was 8.4 million this past quarter, down from 19 million last year. The decrease in segment profit is the direct result of gross margin pressure as well as the consolidation of MJ and spending for the new IT systems and facilities. Our Clinical Diagnostics sales grew 17 percent for the quarter to $156.7 million. These sales were led by continued strong performance in our Quality Control division, including our new Hematronix line as well as our diabetes monitoring and blood virus product line.

During the quarter we won and fulfilled a multi-million dollar tender in Russia, which now makes Bio-Rad the largest supplier of HIV and hepatitis blood screening products in that country. On a currency-neutral basis, Diagnostic sales grew approximately 12 percent. Segment profit for the quarter was $13.5 million. Looking at the full-year results, we are pleased to report annual revenues of $1.90 billion, an increase of more than 11 percent. Contributing to this growth are new products introduced during the year, two strategic acquisitions and currency benefits. Even on a currency neutral basis sales grew 5.5 percent in line with the mid-single digit guidance we gave at the beginning of the year.

Both of our primary segments contributed to growth in 2004. In Diagnostics we acquired Hematronix, a leading provider of hematology control. Our new D-10 diabetes monitoring system achieved record sales with more than 500 placements during the year. And, as I mentioned earlier in December, we fulfilled a sizable blood bank tender in Russia. For the year, Diagnostics sales were $576.4 million, a growth of 12 percent. Currency neutral growth was 6.3 percent. Our Life Science group also posted good sales growth, primarily fueled by the acquisition of MJ in August as well as strong growth in gene expression reagents and our BioPlex system which is used for protein analysis.

For the year, Life Science sales were $504.7 million, a growth of 10.6 percent over last year. On a currency-neutral basis, Life Science sales increased 4.8 percent. Gross margins for the full year were 56 percent, down from 56.8 percent in 2003. This decline was primarily driven by changes in our BSE business as customer contracts with the testing labs came up for renewal and were renewed at a lower price per test. In addition, we amortized approximately 4 million of purchased intangibles into cost of goods sold during the year. Research and Development expense in 2004 was significantly impacted by the one-time charges associated with the purchased R&D of MJ and Hematronix. These charges totaled $14.6 million for the year and negatively impacted earnings by approximately $0.37 per share.

2004 was also a year of significant increases in SG&A expense. Some of this increase is associated with the planned operational investments we have been making throughout the year, but the annual spending also reflects more than 12 million of expense incurred by consolidating Hematronix and MJ into the Bio-Rad family, 5 million spent on Sarbanes-Oxley and increased audit and tax fees, and 16 million of negative currency impacts as the dollar continued to weaken against our primary foreign currencies. And finally, the tax rate also ended the year higher than originally expected, as our divestiture and liquidation of Confocal and the restructuring of Brazil led to non-deductible items for tax purposes. For 2004, Bio-Rad's balance sheet remains strong. As of December 31, total cash and short-term investments were $361 million. Remember that in December we took advantage of the increased liquidity and attractive coupons in the high-yield bond market and issued 200 million of 10-year senior subordinated notes. Like the offering in 2003, we view this as long-term money to invest in the business, such as new product development and operational projects, as well as an investment in strategic acquisitions.

The balance sheet increases in receivables and inventory are primarily due to the acquisitions and currency translations. Net cash generated from operations during the quarter was $51 million, reflecting lower cash taxes in the timing of interest payments. For the year, cash generated from operations was $123 million. Net capital expenditures for the quarter were higher at 18.9 million, as we completed a new manufacturing facility for Life Science. For the full year, CapEx totaled $60 million. And finally, depreciation and amortization for the quarter was $18.7 million and $55 million for the full year, the result of new facilities and increased amortization related to the purchased intangible assets. Long-term debt as of December 31, was approximately $426 million.

In 2005, we are looking forward to another year of progress. We have some exciting new products in Diagnostics and Life Science that will contribute to continued top-line growth. Assuming a relatively comparable currency environment, we expect sales to grow in the mid to high single digits. The growth rates in the first half of the year will likely be higher than the expected overall annual rate because of the addition of MJ, which was not in the first half of last year. In 2005 we are expecting some further pressure on the gross margin due to anticipated pricing pressure in BSE. The full consolidation of MJ, which you know is an instrument-based company with current gross margins running below our historical average, as well as the impact of acquisition-related amortization will also put downward pressure on the margin. For the year, we expect gross margins to be in the 54 to 55 percent range. We will continue to invest in the business, including the implementation of improved IT systems and distribution consolidation and, unfortunately, it looks like the increased costs of external audit and Sarbanes-Oxley compliance will continue.

As I mentioned earlier, our target level of R&D spending remains 10 percent of sales. Over the past few years, we have made good progress in reducing the overall tax rate. For 2005 we are targeting a rate of 30 percent. And finally, the impact of our debt offering in December will add approximately $13 million of additional interest expense in 2005. While we do not have any major specific uses of the increased cash identified today, we will work to deploy these funds into more successful acquisitions and new product development. And now I will turn the call over to Norman for a few comments.

Okay. I think Christine pretty well covered where we are. I just wanted to maybe emphasize a few points, as Christine mentioned, we do have a very strong balance sheet and are well-positioned going into 2005. In 2004 we put a number of new products in the pipeline, which we'll be actively marketing in 2005. I think the largest one of these is the BioPlex 2200, it's a revolutionary new immunoassay system for the Diagnostic lab. Another notable introduction is the Experion Electrophoresis systems for the Life Science research market. This is really a next-generation system that automates and accelerates the discovery process.

And as Christine mentioned, 2004 also brought two new operations into Bio-Rad: Hematronix in Diagnostics and MJ Research into Life Science. Both of these helped to expand the product offerings in key areas of our business. And if you look at these, these kind of internal and external additions to our product portfolio, should both help to fuel our growth in 2005. As we look ahead, we have a number of focal areas for the year. First of all, we have more new products, which we intend to introduce throughout the year, and that's certainly a priority for us. We also want to complete the integration of Hematronix and of MJ Research. Both of these have gone pretty well so far, but there are still a few outstanding items on our punch list. And we have a number of operational products that will also be a focus for the year in the area of SG&A effectiveness, logistics, and supply chain management. Probably kind of wrap all that up, I think, all in all we have -- we do have a lot to look forward to this year. And with that, Mia, we'd like to open it up for questions and we'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Waedon Quang of Time Square Capital Management. Please proceed.

Good afternoon. Congratulations on a great quarter.

Thank you.

On your guidance, revenue guidance, on 2005, make sure -- I want to make sure I hear you correctly. You said mid to high single digits revenues growth? Does that include the benefit for FX or exclude--?

That's kind of assuming that FX rates are pretty comparable to where they were in '04.

Okay, and that also includes the benefit of the MJ acquisitions?

Yes.

Okay. All right. Thanks.

Your next question comes from Jeff Matthews of RAM Partners. Please proceed.

Hello.

Hi, Jeff.

Hi. The extra SG&A costs, if I add up the 6 million MJ, 3 million of audit and SOX and 4 million of negative currency, that's a big number.

I agree.

How much of that goes away in the first half of this new year?

Well, you know, I think in terms if you want to just look where we were in Q4 and kind of as we move into Q1, there's probably 8 to $10 million worth of expenses that don't follow us into Q1 per se, but some of them will be throughout the year. I think SOX will still be an amount that is bigger than we would like it to be for '05, but certainly the negative currency, the 3 million additional in SOX that we saw in Q4 as well as some spending that's usually Q4-related, year-end related, probably doesn't follow us into Q1 or even the first half of the year, but you know, as we get towards the end of '05, then we're back at that, at those year-end expenses.

Secondly, if I look at what you're saying about MJ, especially with their extra amortization that occurs in the gross margin line, is that right?

We have -- most of it is amortized into cost of goods sold. There's a little bit that gets amortized into SG&A as well. So there's probably 5, 6, 7 million of additional expense next year associated with the amortization.

That goes through cost of goods?

Primarily through cost of goods and some of it's into SG&A, but primarily through cost of goods.

Okay. If I look through that, the gross margin impact that you're talking about, the reported gross margins don't look that bad to me.

You may be right about that, Jeff, but the fact of the matter is the amortization is part of our business now, and part of the acquisition, but you know, on an apples-to-apples basis, I don't disagree.

Right, okay. I understand. You could look at this, if you didn't know it and say oh gee, BSE is really affecting things or--.

Right.

-- or they're selling a lot more equipment. I don't know. I guess bottom line to me, MJ's having a bigger impact on a non-cash basis on your margins than I had thought.

And yes, it does have a bigger non-cash impact, and that's why Brad has a lot of good plans that he's going to be executing on during '05 to improve their manufacturing and you know, hopefully, we get real benefit to offset you know, the non-cash costs, as you call them.

Okay. And in terms of the $50 million set-aside, I guess--

Yes?

-- you've had MJ since when, August?

Yes.

Okay. How clear is the picture on what the ultimate liabilities might be?

Well, we continue to have discussions and dialogue regarding the settlement of that contingent liability, and I think given where the discussions are, we didn't change that amount on the balance sheet in the fourth quarter.

Looked pretty good to me. I'll let somebody else ask questions and get back in the queue.

Okay.

Your next question comes from Quintin Lai of Robert W. Baird. Please proceed.

Hi, good afternoon. Could you tell me how much MJ contributed to Life Science's growth in the quarter?

No. You know, as you know, we don't disclose specific product revenue information or even divisional revenue information. Certainly on a year-over-year basis they were a good contributor to the growth in Life Science, but we also had other product lines that had very strong double-digit growth. And the combination of the core business and MJ helped offset some of the weakness that we saw in markets such as Japan.

And then with respect to the contract for blood screening in Russia, is that going to be a quarterly revenue basis or is that a contract on a yearly basis?

I believe it was an annual contract. John Herniette (ph) who is our group operations manager of Diagnostics is with us today filling in for John Goetz.

That's a one-time annual contract, it was shipped in November and December of 2004 and then the contract will be up -- the tender will be up for renewal in the fourth quarter again of next year.

And do you supply them all the reagents for the entire year in Q4?

Yes.

Okay. Thank you very much. Second, with respect to some of the new launches coming up -- for example, BioPlex 2200, is there going to be any additional SG&A in order to -- for that infrastructure rollout, or do you already have that in place?

That's really pretty much in place. We wouldn't expect any major changes in that.

I think it's baked into the 2005 outlook.

And then you mentioned that the Japanese market continues to be soft. Is that Japanese market with respect to BSE pricing or is that academic spending in the Japanese market?

Quintin, this is Brad Crutchfield. It's really both. I mean, clearly there is competition for BSE business, and there's 117 pre-fixtures that choose which test and they have a choice, so we compete for that business on a regular basis, but the big issue for us -- and I think most people -- is the academic market has changed the way they receive funding from the Government, and it's created somewhat of an upheaval with our customers in terms of their reluctance to maybe just spend their budgets, not being sure of where it's going to come from in the future. That is actually resolving itself a little bit now, it's more clear, but it's been somewhat of a change and it's softened the whole Japanese market.

Thank you. And then Christine, on the other income line, on the income statement, what is that 7.8 million? How should we think about that? And then going forward on that line item.

Well, there, you know, there are several one-time uppers, if you will, that are in that line that probably don't repeat in '05. We were successful in settling some older litigation and disputes. For example, during the quarter.

All right, thank you.

Your next question comes from Barry Malmut of Morgan Stanley. Please proceed.

I had two questions. The gentleman just answered the first question about the other income. The second question pertained, again, to that contingent liability of $50 million. Did that in any way flow through the income statement in any way, shape, or form in 2004?

No.

And if that is determined not to be necessary at some point, how would the accounting for that be treated?

Well, theoretically, if you have a contingent liability on your balance sheet and you end up not needing all of it, theoretically, it would flow through the income statement.

Okay.

But--

Historically, Bio-Rad being in a fairly litigious business, I have never noticed an item -- a line item standing out like this. Is this the first time that you've had a litigation accrual line or--?

Right. We acquired MJ Research back in August of '04, and part of the acquisition was a cash payment of around $31 million, and the assumption of litigation that they were embroiled in. And the $50 million contingent liability that was put on the balance sheet at the time was part of that -- came from that transaction, as opposed to, you know, a historical Bio-Rad event, if that's what you're remembering.

Yes. And as far as other -- I guess you can't call them litigation accruals, but where would they typically be housed on the liability side of the balance sheet? Other reserves you may have for other issues that are still pending.

This is Jim Stark. If we had a, let's say a FAS 5 legal reserve for a future settlement or something like that, generally they are put in other long-term liabilities or other current liabilities, depending on when we think they will, let's say, come to fruition.

Okay, thank you.

So it's the nature of it. This one is -- the 50 million in discussion was an acquisition-related one, and of course, for the first year you need to look at what happened in the acquisition and potentially go back. So, this one is a difficult one to resolve at this time.

Okay, thank you.

Your next question is a follow-up from Waedon Quang. Please proceed.

Hi. I missed the breakdown on the 14 million MJ-related SG&A cost. Could you break it down again?

I'm not sure what that is.

You were saying 819 million that probably won't go into 2005.

That's not really MJ-related costs. That was more Sarbanes-Oxley expenses that the Company spent during the fourth quarter, negative currency impact during the fourth quarter, as well as some other expenditures that come generally just in the fourth quarter. That's what we were talking about.

Oh, okay, okay. I guess I confused that with the $14 million related to MJ acquisition. And that won't repeat itself either?

No, that was a charge that was taken in the third quarter of 2004.

So, essentially, the SG&A number, we'll see 8 or 9 million of that going away in 2005? Is that the right way to understand it?

Well what we were talking about is -- I think what Jeff was asking about was kind of does it follow you into the first half of the year. Certainly, throughout the year of '05 there will be spending for external audit and Sarbanes-Oxley compliance. There may or may not be currency impact. That's not something we're able to predict, but I think he was just looking at kind of sequentially what's going to happen with the business.

Oh, I see. So sequentially, we'll see maybe 8 or 9 million of that going away from Q4 into Q1?

Right.

I see, okay. Secondly, can you give us some guidance on the CapEx and depreciation and amortization for 2005?

Well, I think if you look at kind of where we ended up in '04, based on what I can see now, those are probably good levels for '05. In other words, you know, I think depreciation and amortization in the fourth quarter was around 18, $19 million, and that may be a little bit of the run rate that we see on a quarterly basis going into '05. CapEx ended the year at 60 million, and while a chunk of that was driven by a new manufacturing facility, and you know, brought it in above kind of the mid 50 million that we were originally expecting for '04. I don't believe that we moved from 60 to 55 in '05 because there are other facilities, primarily as part of this distribution consolidation in Europe project that we've been talking about. There could be some facility costs related to that, so I would assume around that same $60 million mark for CapEx in '05.

Okay, thank you.

Your next question comes from a follow-up from Jeff Matthews. Please proceed.

Hi.

Hi.

Yes, Christine that, was the way I was looking at that number in terms of going into the new year. I have four follow-up questions. One is, any word on your plans in Brazil? You've talked in the past about restructuring Latin America model?

Jeff, this is Norman. We have been actually restructuring operations a little bit there and continue to work on that, and it's construction in progress.

Okay. Is there any particular heavy lifting there that needs to be done? Is there a lot of cost involved or is it organizational in nature more?

I think it's really more organizational in nature at this time. You know, we've tried to clean that up and recognize all the expenses there, and I think going forward it's really more rebuilding the management there.

Was there any lingering costs in the fourth quarter related to that? As there was in the third?

There was a little bit, Jeff. We continue to get the arms around the situation, and we did write off approximately another million dollars worth of inventory during the quarter.

All right. The Sarbanes spending -- how much of this has been over budget for you? I thought I recalled a $3 million number when we started the year.

Yes, and I think that's about right, and my best guess right now is we probably ended up around 5 million for the year. The external audit piece of it came in higher than we had originally anticipated.

And did it help you at all? Did it help you in terms of your systems, your reporting? Did it help you in any measurable way?

Not compared to the cost. You know, I think, Jeff, the other thing that people don't realize, that while we did have several million dollars of external expense, you can't imagine the number of internal hours and the distraction that this was inside the Company. I got an estimate earlier today that it was something like 15,000 hours that our internal people spent on that.

I believe it.

So it's just incredible, and it's really -- I mean, certainly we'll have some improvements in the systems and that kind of thing. Our systems were actually pretty good to start with, but, you know, compared to the cost and the effort, it's really hard to see the return.

Sure. Did Christine give an estimate for Sarbanes spending this year for '05?

I didn't, but what I did say is that, unfortunately, I don't anticipate it coming down too much off the levels in '04.

Unless they change Sarbanes-Oxley.

That's a big "if."

I agree.

Third, the $5 million sales glitch from last quarter on your ERP System, did that come back in the fourth quarter? Is that hard to determine whatever happened to that? And what kind of -- where do you stand now in the ERP versus three months ago when all that transpired?

We believe it did come back in the fourth quarter. I wouldn't call it that it was a difficult exercise, but we did have to go back and really specifically identify and figure out you know, what every piece was and make sure that it was coming back through and more importantly, make sure that future orders flowed much more smoothly through the system. And I won't say that we're completely done with making it the best-flowing system in the world, but we've made tremendous improvements and I don't think we feel we had those kind of glitches in the fourth quarter.

Okay. And following up on that, Christine. I know this has been kind of your bailiwick, I think, and I wonder, you talked about more costs in '05 for consolidating distribution in Europe related to all this. How do you feel about sticking with Bonn and the kind of extra money you're going to be spending on it in '05 and possibly '06 versus where you thought you'd be a year or two or three ago?

Well, I don't know that I'll comment on Bonn specifically, and quite honestly, that's because I've been different places, and each place used one of the major packages, and frankly, they're all about the same. And what I mean by that is it's up to you to make them the most efficient system for you. And so I think Bonn is as good as any, and probably a little better on the Manufacturing side. So, we'll stick with that and continue to improve the integration of the systems that we have. This year we'll focus on some more of the distribution side, if you will, and continue to improve those. You asked about the timing -- probably does take longer than anticipated or we would like, but more important, it's important that we get this right, we get it successfully integrated so that these systems truly are a value-add to the Company in the end.

Sure. And does it -- so by the end of '05 for example, will there have been a noticeable increase in inventory turn related to this?

Probably not by the end of '05 because '05 is when we're really going to be doing the heavy lifting for this new European distribution, but you know, hopefully in '06 we'll start to see some of that benefit.

Okay. And then, if I could ask Norm, I know hitting $1 billion was a goal, annual sales. What's your goal for '05? What are you going to tell people at the annual meeting or what are you going to shoot for now?

Well, it's interesting. We actually got to pass that $1 billion mark now twice. Because of the way the accounting folks handled the divestiture that we had, but I'm getting used to going through this $1 billion mark. I think that as Christine says, we've kind of given guidance to the mid to high single digits in terms of our outlook. And that seems to be consistent or a little bit ahead of where the markets are going.

But I mean sort of broader than that. Is there anything, is there something else out there that you're looking forward to now?

Well, I mean we've got -- certainly there are opportunities on the horizon. You know, things that we're looking at. We've got teams that are actively evaluating various technologies and opportunities, but nothing that I think is going to land in the next day or two.

Right. It's funny. I asked the $1 billion question because I could have sworn you did that a year ago.

You're right! We're doing it again.

I kept looking at that income statement saying I could have sworn they did that.

Yes, we did.

Could I ask David how he feels about the MJ acquisition now that maybe the dust is settled, and if he sees anything else out there that's exciting him these days?

Okay, this is Dave Schwartz. Well, I think it's kind of nice that it's moved us up in the amplification area, PCR area. It's moved us up to either the Number 1 or Number 2 position in the business, and we'd rather be Number 1 or 2 than Number 3 or 4. And so – and I think the products fit very well. There's very little overlap. We're high-end people. MJ Research was very strong on the low end, and I think we now have a full line and very competitive. We feel very good about this. And they are very good people. That's I think one of the main things we look at.

We're kind of a people-oriented Company, and whatever we do is because people do it, and I think that people at MJ were tremendously relieved to come into the Bio-Rad camp. They went through some difficult times with chapter 11 bankruptcy, and a threat of all kinds of terrible things happening, and they just weren't large enough to come up with whatever it takes to settle this, whether it's 40 million or 50 million or 60 million. We really don't know, but it's not a big stretch for us. So I think it worked out very well for everyone. I think the founders of MJ are happy to have seen the Company saved, and the people there are relieved that they can go back to work and start turning out their excellent products again.

Okay. Well, sorry to take up so much time. I just want to say how much I appreciate--.

Well, since I don't have to run any of this, I feel good about all of it.

Congratulations on getting another year under the belt and nice to see how much you've taken the BSE kind of windfall and invested it for the future. It's great to see.

Right.

Thank you.

Your next question comes from Robert McDorman of Investment Counselors. Please proceed.

Quick question. On the D&A, am I correct it's about 4 or $5 million higher than it was in the third quarter?

Yes.

That's not all MJ-related, or it is?

No, not all of it. It's partially that. It's partially IT Systems and the facilities that are now part of that.

Okay. And were there any sort of extraordinary, new product introduction costs that may have come in in the fourth quarter that won't be -- you know, you get some offsetting revenues in the future from?

Nothing spectacular.

Okay. All right, thanks.

Your next question comes from Chris Arnts of Select Equity Group. Please proceed.

Good afternoon. I was dropped from the call accidentally in the middle of it, so forgive me if I'm repeating what someone might have already asked, but it sounds like from what I've heard that, for the first part of -- at least the first part of 2005, if not the whole of 2005, I mean what we could expect in terms of an operating margin is sort of 8 to 9 percent what you had in the fourth quarter. Is that correct or--?

Yes. Chris, as you know, we don't give such specific guidance down to the operating margin line. We talked about gross margins coming down in '05 versus '04. We talked about while there was some one-time spending, there's still spending to be done and we're still targeting R&D at 10 percent of sales. So you know, hopefully, that will help you get to a pretty good operating margin estimate.

Okay. So yes, I mean, it really just comes down to SG&A, that's the only unknown variable in that equation. And it didn't sound like there was a lot of items that were one-timish in the fourth quarter in SG&A. Is that correct, or not? Or can you help us quantify those?

That is correct. I mean, not one-time for the full year. There was stuff that was related specifically to Q4, but doesn't necessarily make it one-time for all of '04.

Okay. And -- let's see. In the past you've had a target on getting SG&A as a percentage of sales down to a certain level, and I know also that currency affects this because as the dollar weakens, presumably, the gross margin, I would think, would get better -- or should have gotten better -- and the SG&A expenses would be higher as a percentage of sales. Do you still have a target on bringing SG&A as a percentage of sales down and what would that be at this point and over what period of time?

We certainly do have a target, and the target is to get it back to that kind of low 30 percent, 32. Hopefully, eventually all the way back down to 30 percent or -- as a percent of revenue. Some progress will be made in 2005, we're hoping, on the percent, but we're not going to get to those targets in the near-term, primarily because there is a new, permanent level of spending associated with the acquisitions that we've brought on, but more importantly, we have some of these specific projects that we will continue to invest in, whether it's the European distribution project that we've been talking about or IT, or as Norman mentioned, there are some new supply chain things that we're looking into that may cost initially to implement, but we wouldn't do that if we didn't expect good benefit in the future.

Okay. And can you remind us what the total amount of amortization of intangibles is or what you expect that to be in 2005?

You know, probably around the $6 million mark.

6 million annually for amortization of all intangibles?

Well, in the cost of goods sold, it's about $6 million, I would estimate.

Okay, and is there not also -- there was a figure in the SG&A not really that significant?

I'm sorry?

The amortization that's included in SG&A, is that meaningful or is that--?

That's probably another couple of million dollars.

Okay. Great, thanks a lot.

Your next question comes from Matthew Ferroy of Van Berkham Associates, please proceed.

Hi, good afternoon. I'm curious to know why you issued these senior subordinated notes. You alluded to it a bit earlier, but it doesn't seem like you have any near-term plan to put these funds to work, and yet, you'll have 13 million of interest expense to deal with in '05. I understand that it was probably a good window to do it, but without any near-term opportunities, I'm not sure to understand the rationale behind this.

I think it purely was an opportunity. We know that there are things out there that opportunities to invest, and we will pursue those opportunities as the year goes on, but you're right, we didn't have any specific opportunities, you know, anything right away, but just kind of balancing that, the ability to have that long-term money at these very favorable rates against the ability to execute on those opportunities in the future when the money may not be quite as available on balance. We thought it was a good bat and still think it is.

That would be primarily for an acquisition, I would assume, because with all the free cash flows in the business, doesn't seem like you need that amount of capital for any internal development type of initiative.

I think that's generally a fair statement. I mean, there are things that we are investing in in the business as well, but I think it's probably fair.

Okay. And also, on the SG&A line, I was under the impression that '04 was this year of investment in preparation for the significant product launches that you have at the end of this year and in early '05, in that we were going to see some leverage at the SG&A line in '05, considering the good internal growth from these new products. Is it because you found out that you had some -- to spend more incrementally to really have a better distribution and better systems versus the initial thoughts, or has that been the plan all along to continue to have higher SG&A as a percentage of revenue even in '05?

No. I think part of the reason you don't see a big drop in SG&A in '05, as maybe a year ago at this time when we were talking about we were thinking, part of it is just taking on the cost base of two new acquisitions and what comes with that. Part of it is spending that we hadn't anticipated in terms of the magnitude of things like Sarbanes-Oxley.

Okay.

And part of it is there are new projects to implement.

Okay. Last question, again, on that D&A question that somebody asked earlier. The jump sequentially of about almost $6 million, how much of that is amortization and how much of that is increased depreciation versus the run rate that we were used to in previous quarters?

It's probably half and half. And part of the jump was facilities-related.

Okay. I guess as a suggestion, maybe in coming quarters, if you could include in the press release the amortization line and the depreciation line separately, because I guess from an economic process point of view, the amortization of intangibles is something I would sort of deduct myself, if I had the amount, considering that it's just a non-cash expense.

Okay.

That would be helpful, if you could do that.

Okay, that's a good suggestion.

Okay, thanks a lot.

Mia, are you still there?

There are no further questions.

Okay. Well great. Thank you so much for spending the last hour or so with us. We appreciate your interest, and as always, we are available for any follow-up questions you may have. Bye.

This concludes the conference. You may now disconnect. Have a great day.